Question
After geological tests indicated the presence of a small pool of light crude on Renamero Island, General Oil negotiated a two-year extraction license with the
After geological tests indicated the presence of a small pool of light crude on Renamero Island, General Oil negotiated a two-year extraction license with the country's government.
According to the geologists, there are 50,000 (42 US gallon) barrels of (recoverable) oil in the pool.
General's estimates of the cost of extraction and transport of the oil in each period (period 't') as
C(Qt) =25Qt+ 0.0015(Qt)2
where: Qtrepresents the number of (42 US gallon) barrels of oil extracted/sold in period 't' (t = 0, 1)
Because it has a secure, two-period lease, General's planners discount future returns using a relatively low annual interest rate of 5%.
If the price of a barrel of oil is $100, what type of limit, if any, will General encounter when extracting the oil on Renamero Island?
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